While builders are increasingly taking the plunge into Canadian student housing, Harrison Street was one of the first to put an apple on the teacher’s desk.
Niche specialist Harrison Street, with headquarters in the U.S. and the U.K., has been a major player in Canada’s student-housing market for years, with investments near major universities in Calgary, Kingston, Ont., Montréal, Vancouver and Victoria. Still, Canada’s student-accommodation provision rate – defined as the number of students divided by the total tally of beds – falls so far below comparable countries that the market opportunity remains compelling.
Green Street News spoke with Jonathan Turnbull, Harrison Street’s head of Canada, about why the country’s student-housing provision rate lags other countries, the increasing role of foreign capital and what the sector will look like in a few years.
Canada is behind in student-housing provision compared to places like the U.K. or Germany. Why is there such a gap? Did we start building later, or are we just building slower?
I like to think our being behind is because of three interrelated things: availability of capital, expertise and land.
Land is the easiest one to discuss. Most of our universities are in major city centres where land is valued at a premium. Our country has been growing at multiples of the rest of the G7 and there’s competition for that land to build multifamily or condos. Quite frankly, for the longest time, student housing could not compete with those development options because the value proposition in those sectors was so attractive.
The second thing we didn’t have 10 years ago was expertise in student housing. We had expertise in multifamily and condo, so all those people were saying, “I’m making hundreds of millions of dollars building condos, why would I build student housing?” I think that student-housing expertise – development and operational – has improved substantially, but it still is not broad. I believe that lack of expertise is slowly disappearing and that trend will continue with the industry’s next phase of growth with new developers coming into the mix.
And then the last one is institutional capital to help develop/build the sector in Canada. As the person who’s been raising the most capital targeting the sector over the past 10 years, it was not an easy thing to get domestic investors to say, “I’m willing to invest in a new product.” That dynamic created the need to focus more globally and investors outside of Canada understood student housing and we’re willing to invest in a new market like Canada. Similar to the other two “reasons” for historical underdevelopment, this is also shifting as domestic institutional investors have started to focus and invest in the opportunity.
European capital has been increasingly interested in Canadian student housing. Has any of that already been deployed?
They are very interested, and a good amount of capital has already been deployed in the sector. Approximately 50% of our fund’s investors are European institutional investors. Our fund is a diversified alternative real estate fund. However, over 40% of our capital is allocated to our highest conviction sector: student housing. We also have some of our European partners co-investing in some of our student-housing developments … so, they are putting capital to work.
The rationale behind European investor interest is driven by a lot of things. I think even before President [Donald] Trump was re-elected, Europe was very much interested in the Canadian market. Ten years ago, many global investors would likely not focus on Canada because of its correlation to the U.S. market – “Why would I invest in an illiquid Canadian market when it’s so heavily correlated to the U.S? … I’ll just invest in the U.S.” Over the past five years, that sentiment has started to dissipate because of the divergence on interest rates, divergence of real estate performance where Canada has outperformed, which has created a growing interest in the Canadian opportunity. Growth of North American real estate allocation to Canada from 0% to 5-10% is a potential game changer. Student housing has benefited because it is an area they understand and therefore not a hard sell.
How else has what’s happening south of the border affected the Canadian student-housing sector?
I remember when Trump came into power the first time, he restricted the availability of U.S. student visas and created a perception of “they don’t want us there,” which impacted the visa applications into the U.S. market. We saw a substantial uptick in the Canadian university participation rate in global educational immigration during that period, as a lot of people who historically might’ve looked to the U.S. turned to Canada. It’s early in his second term, but it appears to potentially be happening again with the public feud with Harvard and the suspension of student visa interviews. I think our expectation is that Canadian student immigration, and therefore student housing, could benefit again here in the near term.
Are you seeing more interest from Canadian investors in student housing, and when did you start to see that shift?
Two years ago was when you really started to see it. We have started to see some direct investment from the typical market-leading pensions/insurance companies.
Some of those bigger investors have come in, but what you don’t see is the slow, quiet buildup of interest from some of the moderate-sized pensions. Those pensions have historically invested in real estate via more traditional core funds – office, industrial, retail and residential. Those funds had historically delivered consistent, low-risk, core-like returns. That consistency was broken with the arrival of Covid when valuation volatility and divergence of sector performance changed dramatically. Those pensions are now starting to look to alternatives, such as student housing, to get some diversification from their traditional sector allocations.
Did builders wanting to switch condo projects to student housing happen around the same time as developers looking to pivot to PBR, or did it come later?
It came after. The condo guys purchased a substantial amount of high-quality urban land, they paid a lot for it, then the condo market dropped, so they said, “Okay, I’m going to look at doing rental instead.” Unfortunately, now the rental math doesn’t pencil out perfectly when rents were growing 5%-plus per year, so they have started to look at student housing as another option. They’ve spent a lot of money buying high-quality land. Many have done that in a levered manner. Four years ago, the cost of debt was nothing, but now the market has changed and some are facing pressure to “find a solution” and for many, that could be student housing, which can pencil out when other options might not.
I think there are mixed views within the market about the ability of condo players to succeed in student-housing development – some of my peers believe these people are going to fail. I don’t agree. These people have made millions and millions of dollars for themselves and their investors building condos and multifamily. I think there are a few things we should consider. One, they know how to build great properties in complex city environments. And two, they’re not idiots. They’re not just going to run off and say, “I’m going to build student” and not seek the advice or the partnership of somebody that knows what they’re doing in the space. I think condo and multifamily developers will be great additions to the market since they control a great deal of the land near major schools, they have access to capital and they know how to build great properties.
Are all student-housing projects penciling, or is there a specific built form that works?
I wouldn’t say all student-housing projects pencil out. I think the reality is … “math is math.” When land costs have grown to X dollars per buildable sq ft and construction costs have grown to Y dollars per buildable sq ft, you better figure out a way to make it so that you are getting your highest rent per sq ft to generate a high-enough return to make the project economic. What you need to do is figure out within each individual market what unit configurations [and] size allow you to do that, because students pay on a price per bed, so density is important. The smaller the unit, the more beds per sq ft, the better.
Affordability is an incredibly important element to this. There are a lot of my peers who think that international students will pay whatever it takes to get their son or daughter into a building. I don’t think that’s the case when 80% of the students are domestic. Canada is different from student-housing markets such as Australia, which is 90-plus% dependent on international students, mainly Chinese students. Canadian students – and their parents – who pay $7,000/year for their education think long and hard before writing a series of 12 $2,000/month rent checks. Even the international students at Canada’s universities do not have unlimited resources.
You touched on the issue of land availability near major universities. What’s the solution there, if there is one?
Unlike before, I think we’ve got a solution available to us right now. All the condo and multifam developers accumulated all the high-quality land before the market correction and are now looking for solutions. With the credibility of student housing increasing in the eyes of a lot of those people, I think that’ll have more legs, so to speak. I don’t think this is just a one-and-done type of opportunity. As we show success around taking this land and repurposing it profitably, it’s going to elevate the strategy in the marketplace for the long term.
We still have a break in people’s view around the value of land and where we want to buy it. There’s still a bit of a bid-ask spread, and that’s just a natural evolution. Maybe in a city like Toronto, you had it marked at $250/buildable sq ft … student housing likely doesn’t work at $250/buildable, but multifamily doesn’t work until you get to about $75 to $100/buildable sq ft … somewhere in between is a solution that can work for all parties. We are starting to see momentum building in that “space in the middle.”
Looking at the Canadian student-housing landscape over the next few years, how are you expecting it to change?
I think it’s going to continue to grow. You’re going to continue to see new development in the major city centres and I think it’s going to be on the backs of a lot of these condo and multifamily folks shifting focus and working with people like us. It’s still going to be grossly under the supply demands. Think about it: Canadian university enrollment is growing by [about] 25,000 [new students] per year. How many new beds are the universities and private sector building? Not a lot. If we doubled it, we’d still only be building 4,000 or 5,000 a year … so we’re still falling behind. The supply-demand gap is widening.
Universities are increasingly proactive in building new beds to help them support their desired policy of providing every first-year student an on-campus bed option, which will be welcomed by the private sector – as well as thousands of parents. An increase in university beds will likely create added pressure to build more private supply because the universities building first-year residences have a compounding impact on demand for subsequent years’ off-campus housing. Building a new 500-first-year-beds residence at a university likely increases their first-year enrolment by a similar amount, which three years later has increased the aggregate market needs by a further 1,500 beds to support the increased second-, third- and fourth-year students created by the initial on-campus build. I think you’re going to see that supply-demand imbalance continue to gap out.
